Fight to kill CFPB arbitration rule could rest on whose data is right

WASHINGTON — With lawmakers poised to vote as early as this week on a measure overturning the Consumer Financial Protection Bureau's arbitration rule, opposing sides in the arbitration debate — both in and out of government — are still battling over whose data is more credible.

A key theme of the back-and-forth since the CFPB released its rule in July is whether the bureau fudged its data analysis of the effect of the new regulation on consumer credit costs. Notably, the Office of the Comptroller of the Currency, an opponent of the rule, has claimed that — based on the CFPB's data — there is a 56% chance that credit costs would jump at least 3.5 percentage points, with credit card rates jumping from an average of 12.5% to 16%.

But some outside observers have questioned the OCC's analysis. While they do not guarantee zero credit costs resulting from the rule, they view the OCC's finding as a stretch.

“While the Treasury Department cherry-picked arguments, the CFPB’s comprehensive report on forced arbitration demonstrates that hard-working Americans benefit when they get their day in court,” said Sen. Sherrod Brown, D-Ohio, the ranking member of the Senate Banking Committee
Bloomberg News

"The uncertainty of [the OCC's] estimate is very large, it's a very noisy estimate, and there is quite a high chance that the true effect is zero," said John Campbell, the Morton L. and Carole S. Olshan Professor of Economics at Harvard University, who is a member of the CFPB's Consumer Advisory board. "The CFPB argues in its defense that the effect can't be a large number like 3% because it's ridiculously large, relative to any reasonable estimates or costs based on past class-action suits."

Yet the OCC and other critics of the CFPB were bolstered on Monday when the Treasury Department joined the chorus of voices criticizing the CFPB's conclusions about the rule's impact on consumers. The Treasury report did not present its own finding on projected consumer costs but instead praised the OCC's review.

"This independent review underscores Treasury’s concern: that the bureau’s analysis does not convincingly rule out higher credit costs for consumers," the report said.

A louder administration voice in the debate comes as GOP congressional leaders try to tie down enough votes to overturn the CFPB rule — which bans arbitration agreements that preclude consumers from seeking class actions — through Congressional Review Act.

The legislative clock is ticking. Under the CRA, the Senate would need to nullify the arbitration rule by mid-November. With a four-vote advantage, Republicans can only afford to lose two votes, in which case Vice President Mike Pence could cast the tie-breaking vote.

While most Republicans appear on board to overturn the rule, attendance has been a problem. Sen. Thad Cochran, R-Miss., has been largely absent with a health issue and Sen. John McCain, R-Ariz., who was diagnosed with brain cancer in July, has been receiving treatment back home. Meanwhile, Sen. Lindsey Graham, R-S.C., who has close ties to trial attorneys, will not vote for a repeal, and Sen. John Kennedy, R-La., has kept his views close to the vest.

Observers said the Treasury report adds heft to both a congressional and legal challenge of the rule.

“We see this [Treasury] report as a way to provide political cover to Senate Republicans who are worried about voting to void the mandatory arbitration ban given recent troubles at Equifax and Wells Fargo,” Jaret Seiberg, an analyst at Cowen, wrote Monday in a note to clients.

Both Treasury and the OCC have argued that the CFPB did not follow its own cost-benefit analysis, in violation of the Administrative Procedures Act.

The CFPB finalized the arbitration rule even though its own 2015 study found that four out of five consumer class action lawsuits result in no recovery for class members, Treasury claims. The study also found consumers received $32 on average per person from class action settlements, compared to $5,400 on average in arbitration.

"This suggests that consumers value class action litigation far less than the bureau believes they should," the Treasury report stated.

But Sam Gilford, a spokesman for the CFPB, said the Treasury report just rehashed industry arguments that were already "analyzed in depth and solidly refuted in the final rule."

"Our rigorous analysis of the costs and benefits of the rule found that mandatory arbitration clauses allow companies to avoid accountability for breaking the law and cost consumers billions of dollars by blocking group lawsuits," Gilford said in an emailed statement. "Banks, credit unions, and other companies file class action lawsuits to pursue justice when they are harmed as a group, and our rule restores consumers’ right to do the same."

Other economists challenged the OCC's data, casting doubt on anyone's ability to predict consumers costs resulting from the rule.

"Any statistically significant results would be highly questionable given the level of noise in the data," Alexei Alexandrov, a senior economist at Amazon and a former senior economist at the CFPB, who had written a paper that was the basis for the CFPB's own arbitration study.

Sen. Sherrod Brown, D-Ohio, the ranking member of the Senate Banking Committee, said the scandals at Equifax and Wells Fargo were among the reasons companies should not be shieded from class action lawsuits.

“Working people pay the price when large financial institutions like Wells Fargo and Equifax use forced arbitration to cover up egregious cheating,” Brown said in a statement. “While the Treasury Department cherry-picked arguments, the CFPB’s comprehensive report on forced arbitration demonstrates that hard-working Americans benefit when they get their day in court.”

However, Ted Frank, a senior attorney and director at the Competitive Enterprise Institute's Center for Class Action Fairness, said that even if the CFPB's study found that an increase in credit card rates was not statistically significant, that "does not mean it's not significant."

"They often cherry-pick their data," said Frank. "To say it's not statistically significant, therefore there's no effect, that's wrong. What you can say is, we can't be confident there is an effect but there probably is an effect, and more study is needed."

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